A quick market update

NOTE: This Trading alert was originally posted at Ritholtz Research & Analytics on Thu 7/27/2006 11:04 AM EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location on the blog.

I’ve looking for proof this market is turning around, and that the recent rally is sustainable — and I have yet to see any firm evidence. So far, the up days have been on mediocre volume. The action seems to be driven more by short covering than actual buying.

As we noted this morning in "What we are watching" good earnings seem to be greeted with a yawn, while bad numbers or weak guidance get punished.That implies a lot of the good news is already baked into the cake.

We have been in cash, looking for an opportunity to either get long or go short (color us agnostic). The wild card is headline risk from the Middle East, GDP tomorrow, and what the Fed will say or do next.

While the evidence as to the next directional move is thin — its not nearly conclusive enough for me to make a formal recommendation to you yet— I have put out a few index shorts (DIA, SPY & Qs) in the hedge fund. Not big positions, just smallish "tests" which I might either add to — or remove totally — over the next few days.

The light volume and somewhat bullish backdrop make me suspicious that the next move will have a downwards bias. The market feels like, despite the recent gains, that its running low on fuel. Ideally, a short sharp move downwards would get the market to a much more oversold condition than we saw before the July 19th rally. That would create a much more desirable entry point for a potentially strong August rally — perhaps even, themarket’s last hurrah.